Mastering Contractor Cost-Plus Contracts

‍

First, what is a cost-plus contract? A cost-plus contract is a construction agreement where the contractor is reimbursed for the project's actual costs plus an additional fee that accounts for overhead and profit. You can use this agreement when you are less certain on the total cost of the project or your customer expects transparency on your actual costs in the relationship. If you need to show receipts to get the job done, you can use contractor cost-plus contracts.

‍

Key Components of a Cost-Plus Contract:

‍

1. Project Costs: These include direct expenses like labor, materials, subcontractor fees, and equipment rentals.
2. Contractor Markup: The contractor receives a fee to cover overhead and profit. This can be structured in several ways:
   • Percentage of Cost: A percentage of the total project cost, typically between 5% and 25%.
   • Fixed Fee: A predetermined flat fee regardless of the final project cost.
   • Incentive Fee: Additional compensation for meeting or exceeding project targets.
   • Award Fee: A bonus for exceptional performance.

Transparency is key, being able to send the receipts to show your actual costs is critical. This is why using a tool like Outpave, which automatically attaches the receipts to the invoice, can help you stay ahead with your customers.

‍

Common Variations:

‍

• Cost-Plus-Fixed-Fee: The contractor is paid the project cost plus a set fee. Best for projects with uncertain costs where both parties want full transparency. You are paid the project cost plus a set fee, ensuring predictable profit.

• Cost-Plus-Incentive-Fee: Offers rewards for completing the project under budget or ahead of schedule. Ideal for projects with strict budget or timeline requirements. Remember, this is also leverage. If incentives are being discussed for finishing faster, that means you should be uncharging the customer to move this fast. It's more important that the project is done right and on-time as it likely causes problems the longer it takes to complete.

• Cost-Plus-with-a-Guaranteed-Maximum-Price (GMP): Caps the total cost, reducing the owner's financial risk. Suitable for projects where the owner wants to limit financial risk. This variation caps the total cost, ensuring that any overruns are the contractor’s responsibility, which encourages budget adherence. This puts the risk on you, so you need to include a variable overhead in the contract cost itself to reduce your risk.

‍

Addressing the “Balloon Percentage Payment” Concept:

‍

‍Some variations involve a “balloon” payment at the end of the project, which serves as a performance incentive. If you exceed the budget, the balloon payment is reduced. This approach can create tension if budget overruns occur due to unforeseen circumstances. You can also have problems if you are using a line of credit to fund materials for the job. If that line of credit maxes out prior to you reaching the balloon payment, you are taking on a significant risk. Ensure you have enough fluid cash to take on and complete this type of job.

‍

Best Practices for Cost-Plus Contracts:

‍

1. Define Reimbursable Costs: Clearly outline what expenses are reimbursable, including labor rates, materials, and subcontractor fees. This should be in your contract.
2. Set a Guaranteed Maximum Price (GMP): Limit the owner’s financial risk by capping the total cost. Only do this if you know for sure that you can meet or exceed this amount and it's required by the customer.
3. Document Thoroughly: Maintain detailed records of all expenses, including invoices, receipts, and payroll records. This is where a solution like Outpave comes in that can automate the cost tracking for you.
4. Use Transparent Cost Tracking: Provide regular cost reports to keep the owner informed and build trust.
5. Establish a Clear Payment Schedule: Define when payments will be made, such as monthly progress payments and a final payment upon substantial completion.
6. Include Change Order Procedures: Specify how changes to the project scope will be handled and documented.
7. Build a Collaborative Relationship: Foster trust and open communication between the contractor and owner to ensure a successful project.

‍

How Outpave Can Help Manage Cost-Plus Contracts:

‍

‍Managing cost-plus contracts requires accurate cost tracking, transparent reporting, and efficient payment processing. Outpave automates these processes, streamlining expense management and improving financial oversight.

1. Real-Time Expense Tracking: Capture and categorize all project expenses, ensuring accurate cost reimbursement.
2. Detailed Cost Reports: Generate comprehensive cost reports that provide visibility into project expenses and contractor fees.
3. Budget Monitoring: Track spending against the estimated budget and identify potential overruns before they occur.
4. Compliance and Documentation: Maintain a digital record of all invoices, receipts, and payment approvals, ensuring compliance with contract terms.
5. Include receipts on invoices: If you allocated all receipts to the job, you can then pull those into the invoice prior to billing the customer making cost tracking seamless for you.

By using Outpave, construction companies can manage cost-plus contracts more efficiently, reducing risk, improving transparency, and ensuring projects stay on budget. Whether you're a contractor looking to streamline expense tracking or an owner seeking greater cost control, Outpave is the ideal solution for managing construction finances.